December 13, 2002

Question

Why is it when revenues don't match estimates, it is always portrayed as the fault of the revenue? Isn't it really the fault of those who made the estimate?

After all, tax revenue is the natural result of the natural economic activity of 5.6 million Tennesseans. The estimate is an artificial number created by the five-member State Funding Board - the governor, secretary of state, comptroller of the treasury, state treasurer, and commissioner of the Department of Finance and Administration - who are aided by testimony from three economists. In the past four years, the board - dominated by pro-income taxers - has selectively heard only from economists who are either openly in favor of or not publicly hostile to the income tax.

So why is the artificial "estimate" created by 8 people considered right and valid, while the natural economic activity of 5.6 million people is considered wrong and invalid?

Perhaps stories like this one and this one would be more accurate and fair if instead of blaming the budget gap on "sluggish revenues" and tax collections that "may fall short," they were to describe the budget gap this way in reporting on the monthly revenue data:

NASHVILLE - State officials today reported that, four months into the fiscal year, it is clear that the officials whose job it is to estimate how well the economy is doing and, therefore, how much revenue the state will collect, did a poor job in making their estimate for the current fiscal year. Because of the State Funding Board's over-optimism, the legislature has over-committed the state to the tune of at least $28 million this year. If the estimate continues to be wrong, the state could be over-committed by $60 to $90 million this year.

Some ascribe the mistaken estimate to ineptitude on the part of the Funding Board. Others say it is the Board's myopic refusal to hear from more than a small number of economists, one of whom (the University of Tennessee's Dr. Bill Fox) is an incessant cheerleader for higher taxes and more state spending. These critics note that there are several highly qualified economists in Tennessee that the Board ignores - and in each case those economists happen to be proponents of limited government and low taxes.

That story would more accurately reflect the truth about revenue estimates and the State Funding Board.

There is a solution: Base each annual budget on an estimate of zero percent revenue growth - in effect, the state would plan to spend next fiscal year exactly the amount of revenue it collected this fiscal year. Then, if revenue came in above that "estimate," - which, historically, it would do at least 95 percent of the time - the state would have a surplus.

For more on the State Funding Board, click here and here and here.